A mortgage is a temporary, conditional pledge of property to a creditor as security for performance of an obligation or repayment of a debt. Typically, a homeowner agrees to a mortgage in order to borrow money for purchasing or refinancing their home or dwelling. Many types of mortgages are currently available including mortgages of various lengths, mortgages with different types of interest rates (such as, fixed, variable, or a combination of the two), and mortgages that allow the borrower to pay interest-only on the loan for a period of time or allow negative amortization wherein the monthly payment is less than the monthly interest. These types of mortgages may also be known in the industry as regular mortgages or “forward mortgages.”
Another type of financial arrangement between a lender and a homeowner is called a “reverse mortgage.” A reverse mortgage is a loan that allows homeowners, usually older homeowners, to convert their existing home into available funds without the need to make monthly loan payments. The available funds may be provided, for example, through a line of credit, a cash advance, or periodic disbursements to the homeowner. The funds received by the homeowner are repaid with interest at a predetermined maturity date, or more commonly, when the home is no longer the principal place of residence for the homeowner. Typically, if the homeowner sells the home, moves, or dies, the loan is due to be repaid.
Frequently, the amount of the reverse mortgage is based on a percentage of the homeowner's home value. In general, the older the homeowner and the higher the home value, the larger the reverse mortgage loan amount available to the homeowner. If necessary with the future payoff, the reverse mortgage balance is repaid with the proceeds from selling the house. Currently, under U.S. federal regulations, a reverse mortgage is a non-recourse loan, and thus, the repayment amount cannot exceed the home's value at the time of repayment. In general, many lenders allow repayment of the reverse mortgage to be deferred until the homeowner dies or no longer lives in the home. Accordingly, if the borrower is older, a lender is typically willing to provide a higher percentage of the homeowner's home value as a reverse mortgage. Other factors may also be utilized in determining a reverse mortgage.
However, forward mortgages are by far the dominant form of mortgages used today.